All about 'Resident but not Ordinary Resident', and why this special status is accorded

Jan 31, 2013, 09.28PM IST[ Deepa Venkatraghvan ]

For income tax purposes in India, you can be a 'Resident Indian' or a 'Non Resident Indian.' Or you can also be a 'Resident but not Ordinary Resident (RNOR).' In this article, we take a look at who an RNOR is and why this special status is accorded.

Who is an RNOR? To understand who an RNOR is, we first need to understand the definitions of resident and non-resident Indian.

A person is a resident Indian in a particular year if he fulfills either of these two conditions: -He/she has been in India in that year for 182 days or more or -He/she has been in India for 60 days or more in that year and 365 days or more in the 4 years preceding that year

A person who does not fulfill the above conditions is considered to be a non-resident.

Now, if you have recently moved back to India after spending many years overseas, you must check for the status of RNOR.

A person is an RNOR if he meets either of these two conditions: -He/she has been non-resident in India, that is, an NRI, in nine out of the ten previous years preceding that year, or -He/she has, during the seven previous years preceding that year, been in India for a period of 729 days or less

Now depending on the date of return, a person can take the benefit of the RNOR status for up to 3 tax years in India. (Note than a tax year in India is a fiscal year, that is, from April to March)

Illustration: Rakesh Verma returns to India on 15th January 2011 after spending more than 20 years abroad. The first tax year for him in India would be 2010-2011. Does he qualify as RNOR in 2010-2011? Yes, because: -He has been an NRI for all the years preceding 2010-2011.

Will he qualify as RNOR in 2011-2012? Yes, because -He will have been an NRI for nine out of the ten previous years. That is, except for 2010-2011, he will have been NRI in all other years

Will he qualify as RNOR in 2012-2013? -He will not have been NRI for nine out of the ten previous years because he would have been RNOR for 2010-2011 and 2011-2012. -During the seven previous years, that is for the seven tax years from 2005-2006 to 2011-2012, he would have been in India for the entire 2011-2012 (366 days) and for 75 days in 2010-2011. That's 441 days in total which is less than 729 days. Because he will fulfill this second condition, he will qualify as an RNOR in 2012-2013 as well.

Will he qualify for RNOR in 2013-2014? -He will not have been NRI for nine out of the ten previous years because he would have been RNOR from 2010-11 to 2012-13 -During the seven previous tax years, that is from 2006-2007 to 2012-2013, he would have been in India for 365 days in 2012-2013, 366 days in 2011-2012 and 75 days in 2010-2011. That's 806 days in total. Since he will not fulfill either condition, he will be considered as Resident Indian in 2013-2014.

Why this status? The RNOR is a special status accorded in order to provide some benefits to returning NRIs. For Indian income tax purposes, an RNOR is treated at par with NRIs. That means, an RNOR needs to pay tax in India only on his Indian income. Any income from abroad will not be taxed in India. These include: -Any interest or dividends from foreign securities -Any capital gains from the sale of foreign assets including property -Any withdrawals made from foreign retirement funds such as 401K plans for US based NRIs -Interest on Foreign Currency Non Resident (FCNR) bank account held in India (until maturity) -Interest on Resident Foreign Currency (RFC) account

(Note: There is one exception here. Income received and accrued outside India from a business controlled or set up in India is taxable in India, even for an RNOR)

These exemptions will allow NRIs to bring back their foreign assets into India without the burden of heavy taxes. Once the person becomes a Resident Indian from the RNOR, all his foreign income will be taxable in India. "However, concessions and exemptions granted under the Double Taxation Avoidance Agreement, if any, between India and the country of the NRI's original residence will be applicable and relief will be granted as regards tax paid outside India on the overseas income liable to tax in India," explains Rajesh Dhruva, CEO of femaonline.com.

Another exemption is that of Wealth Tax. For RNOR, assets located outside India are exempt from Wealth tax in India. Once his status changes to Resident India, his foreign assets will come under the purview of Wealth Tax.